Den norske Bank, Oslo, Norway; The Norwegian School of Economics and Business Administration, Bergen, Norway; DnB Markets, NO-0021, Oslo, Norway. E-mail: jostein.tvedt@dnb.no

Abstract

The paper tries to bridge the gap between traditional equilibrium shipping market models and the recent maritime asset pricing literature. Price processes that are generated by an equilibrium model with fairly standard supply and demand relations prove to be very close to popular mean reverting stochastic price processes that are used in the finance or real option literature. It is argued that rigidities in either the construction of new tonnage or yard capacity significantly contribute to the mean reverting property of freight rates. A stochastic optimal control problem is presented that includes the effect on freight rates of rigidities in yard capacity. The optimal investment and restructuring policies under switching costs are derived. The properties of the equilibrium freight rate process are close to that of a standard geometric mean reversion process.